30 years later, the legacy of California's prop. 13 offers lessons for today.

Summer 2008 marks the 30-year anniversary of California's Proposition 13, the landmark property tax limit that sparked a property tax revolt in many other states.

According to California fiscal policy expert Michael Coleman, who presented at a meeting of the state municipal leagues in Monterey, Calif., in June, California's experience in the past three decades provides a lesson for state and local governments dealing with the current economic downturn and its implications for property taxes.

Coleman noted that "The legacy of Proposition 13 is still being written 30 years later," and shared two key messages with state municipal league leaders. The first is that the lack of a policy response to a crisis on the part of state and local leaders might lead to other, less desirable responses, from voters or other constituencies. The second is that permanent responses, like Proposition 13, to short-term economic changes are usually accompanied by unintended consequences that policy makers will have to live with for years to come.

Proposition 13 was passed by California voters in June of 1978 and contained a number of reforms to the property tax system utilized by local governments. It capped the property tax rate at 1 percent of property value, limited annual growth in property value for tax purposes to 2 percent, rolled back assessed values to 1975-76 levels and limited reassessment of the value of property to when the property changed ownership.

Proposition 13 also transferred the authority for allocating property tax revenues across levels of local government to the state government, a provision with consequences that reverberated in state-local relations for the next three decades.

Coleman cites a number of factors as leading up to Proposition 13's passage that are similar in many ways to circumstances facing state and local governments today. The state and much of the nation was in the midst of an economic transition where home values had been rising sharply for some time, resulting in higher property tax bills as home values were reassessed. State and local governments weren't able to respond effectively to widespread calls for property tax relief, further fueling anti-property tax sentiment.

The result, Coleman said, is that California has spent the next three decades playing out a set of post-Proposition 13 responses. Proposition 13's progeny have included state legislative actions for implementation, transfers of revenue and authority among state and local governments to deal with revenue shortfalls, legal actions to clarify the meanings of language and application of specific provisions, and additional propositions seeking to strengthen or weaken certain provisions.

While much of the public support for Proposition 13 was fueled by desires for property tax relief for residents, a greater share of that tax relief, over time, has gone to the commercial sector. Other impacts of Proposition 13 include a mismatch in terms of state-local control of revenue and services, state allocation of property tax revenues, less revenue from the property tax, greater local government reliance on state aid, and more local government reliance on fee revenues.

An additional impact has been that tension among levels of government increased post-Proposition 13 as state and local governments battled over control and shares of revenue.

In response, a coalition of cities, counties and special districts eventually placed Proposition 1A on the ballot in 2004, prohibiting the state from reducing local governments' property tax proceeds, allowing the state to suspend this prohibition only during a fiscal emergency, and if the state should then transfer or reduce local property tax proceeds, requiring that those proceeds be repaid within three years. The proposition passed with overwhelming public support.

Most public opinion polls in California indicate that Proposition 13 would still be supported by a majority of voters if placed on the ballot today, which means that Proposition 13's legacy will likely continue to be recast over time. Coleman says this leaves the state in a vicious cycle where "the system becomes more complicated and less transparent over time, creating more distrust and eventually fueling another backlash on the part of voters."

Similar types of property tax limits now exist in many states (for a listing, see NLC's recent research report Cities and State Fiscal Structure). Most recently, property tax limits were enacted in Florida and Indiana in the past year, and limits are under consideration by voters and or state legislatures in Nevada and New York, among others, in 2008.